The Indian rupee (INR) is one of the most traded currencies in the world. Understanding the factors that influence its value is essential for investors, businesses, and policymakers. The rupee fell over 11% in 2022, making it the worst-performing Asian currency as it struggled against a challenging global environment. It is worthwhile to note that most Asian countries depreciated more due to the dollar’s inherent strength rather than their own weakness.
From the US dollar to India’s current account, forex reserves and domestic macro-economic developments, these are some of the factors that can determine the value of the rupee. Investors and businesses operating in or with exposure to India must monitor these factors closely to make informed decisions. Additionally, policymakers in India, including the Reserve Bank of India, have a crucial role in maintaining currency stability through prudent monetary and fiscal policies. Since there is no single factor that determines the INR value, analysts and traders tend to look at the combination of all these factors that could influence the INR/USD exchange rate.
India’s inflation rate can have a significant impact on its currency. High inflation erodes the purchasing power of a currency and can lead to its depreciation.
The level of interest rates in India also can impact the rupee. Higher interest rates can attract foreign capital, strengthening the Rupee, while lower rates can have the opposite effect.
GDP growth is closely linked to the rupee’s performance. A robust growing economy will offer support to the rupee, as it will potentially attract foreign investments.
The government’s fiscal policies, including budget and tax policies can impact the rupee’s value. A higher fiscal deficit can lead to concerns about foreign exchange stability.
India’s trade policies, import and export regulations, tariffs, and trade agreements, are also significant factors that can affect the rupee’s exchange rate. A trade surplus tends to push the rupee higher, while a deficit can push it lower.
Exchange rates are influenced by the relative strength of the Indian rupee against major currencies such as the US dollar or the euro (EUR).
Geopolitical events such as wars, tensions between countries and political instability can have a significant impact on currency markets as uncertainty can lead to currency depreciation.
Fears about the health of the global economy can affect global market sentiment and weaken the rupee, as investors turn to safe-haven currencies such as the dollar or the yen.
India’s balance of payments including trade balance, capital flows, and remittances can also affect the currency value. A current account deficit can weaken the rupee.
Foreign investments in India, particularly long-term FDI can boost the rupee.
Investor sentiment, news and speculation can affect short-term fluctuations in the rupee’s exchange rate.
Central Bank intervention
The Reserve Bank of India (RBI) can intervene in the foreign exchange market by buying or selling rupees to stabilise its value. These interventions can have an impact on the rupee’s exchange rate.
The Indian rupee is expected to trade in a tight range over the coming months as the Reserve Bank of India continues to intervene in the market to protect the currency against a strong US dollar, according to a Reuters poll of FX analysts.
With a strong USD, the outlook for many currencies against the US dollar is looking weaker.
The RBI’s foreign exchange reserves (INFXR=ECI) fell to a four-month low of $590.7 billion since the 22nd of September. They may fall further in the coming months as the price of oil rises sharply. Oil is the country’s biggest import and if its’ price increases more, then the rupee will experience additional pressure. Oil prices surged nearly 30% last quarter.
More than 60% of analysts, 29 of 46, anticipate the rupee to see a new record low within a year.